Green Horizons Newsletter - AgEBB

Green Horizons

Volume 9, Number 4
Fall 2005

Important changes to federal income tax laws for private forest landowners
Larry Godsey, Economist, MU Center for Agroforestry

Several changes were made to the Federal Income Tax laws in 2004 that affect private forest landowners. Most notably is the elimination of the reforestation investment credit that allowed landowners to take a tax credit of up to ten percent of the first $10,000 spent on commercial afforestation/reforestation. Reforestation expenses that are incurred before October 22, 2004 are still eligible for this tax credit. However, reforestation expenses that are incurred after October 22, 2004 are now eligible for a new amortization and deduction that allows the landowner to deduct the first $10,000 of qualified reforestation expenses in the year that they occur and any amount over $10,000 can be amortized over an 84-month period.

In addition to the reforestation deductions available, the Section 179 business investment deductions have increased. Section 179 deductions are limited by the maximum dollar limit, the investment limit, and the taxable income limit. In 2004 the maximum dollar limit increased from $100,000 to $102,000. In other words, the Section 179 deduction cannot exceed $102,000. Likewise, the investment limit was increased in 2004 from $400,000 to $410,000. In other words, if a landowner invests $420,000 on Section 179 property, then the amount that can be deducted is reduced by $10,000 ($420,000 - $410,000 = $10,000). The total deduction on that investment would be $92,000 ($102,000 - $10,000 = $92,000). This deduction cannot exceed the taxpayer’s taxable income for that year. Property that qualifies for the Section 179 deduction includes:

  • Tangible personal property (e.g. agricultural fences, machinery, and equipment)
  • Business property (all business property, other than structural components, contained in or attached to a building... e.g. office equipment)
  • Livestock
  • Single purpose agricultural (livestock) or horticultural structures.

Because of the numerous assumptions and exceptions to taxable income deductions, it would be to the advantage of the taxpayer to seek professional guidance when more than one deduction is available.

Another change that took affect in 2004 is the addition of the Forest Land Enhancement Program (FLEP) in the list of small watershed programs that qualify for the Section 126 income exclusion. Under Section 126, all or a portion of cost-share payments received under a select list of conservation programs can be excluded from gross income. Other programs that qualify for the Section 126 income exclusion include the Forestry Incentive Program (FIP), Forest Stewardship Incentive Program (SIP), the Wetlands Reserve Program (WRP), the Environmental Quality Incentives Program (EQIP), the Wildlife Habitat Incentive Program (WHIP), the Conservation Reserve Program (CRP) and various State programs designed to improve forests. To determine the amount of the exclusion, a four-step procedure is followed. For more information on this procedure, consult the IRS Publication 225 Farmer’s Tax Guide or your local tax professional.

Finally, the most important change for forest landowner’s who manage their timber as part of a business is the ability to apply capital gains treatment to a "lump sum" timber sale. Prior to 2005, the only way timber business owner’s could get capital gains treatment for the sale of their timber was to sell the timber as either a Section 631(a) (cutting of standing timber with an election to treat as a sale) or Section 631(b)(disposal of standing timber with an economic interest retained) transaction. The new change allows lump sum sales of standing timber that is cut after December 31, 2004, to be taxed as a capital gain. The timber must meet the requirements of long-term capital assets, more specifically, the timber must be held for more than one year prior to the date of disposal. The date of disposal for outright sales may be the date that payment is received. It is important to note that income from the sale of cut products, such as logs, is considered ordinary income. For more information regarding capital gains treatment on the disposal of standing timber, consult the IRS Publication 225 Farmer’s Tax Guide, IRS Publication 544 Sales and Other Dispositions of Assets, or your local tax professional.

For more information about forestry tax laws visit the National Timber Tax web site at

[ Back to Articles ]